By Kathleen Martin
Netflix, Inc., (NFLX) is an Internet subscription service. It has more than 20 million streaming subscribers in the United States, Canada and Latin America. Subscribers can watch content over a variety of mediums including PCs, Apple (AAPL) products, mobile devices, Internet connected television, disc players and game consoles.
NFLX shares are trading around $70 up from its 52 week low of $62.37. The stock’s year high was $304.70.
NFLX cash position is $365.77 million, debt is $234.66 million, book value per share is $7.40 per share. Comcast (CMCSA) the owner of Hulu trades around $23 has cash of $1.81 billion, debt of $40.97 billion and a book value per share of $17.13. Hulu’s subscriber based reached over one million users in 2011. It has streaming and distribution agreements with many quality content providers. Amazon (AMZN) trades around $190, has cash of $6.33 billion, no debt. Book value per share is $17.07. HBO, owned by Time Warner Cable (TWC) has 80 million subscribers, trades at approximately $61 has cash of $5.59 billion, debt of $26.77 billion and a book value of $23.85 per share. Verizon (VZ) has 10.7 million subscribers, trades near $38, has cash of $10.86 billion, debt of $62.75 and a book value per share of $13.70.
These figures are useful comparisons as they demonstrate the ability of each company to cover the costs of content acquisitions and delivery to their subscribers. AMZN, while not purely in the business of delivering viewing content to its international users, does offer free downloads of music and dvd titles with purchase of other items in its online environment. These free titles highlight Amazon’s to adapt to its business from online bookstore in 1996 to its current incarnation and its capability to generate enough revenue from its core activities to offer viewing alternatives as a loss leader. Its position in electronic commerce allows it to purchase or license content at greatly reduced prices than other providers. Amazon will probably continue to provide an agitating presence to Netflix.
VZ recently announced that it plans a Netflix style streaming service and its success is largely dependent on its capacity to provide compelling content to its subscriber base. While Hulu, owned by CMCSA, has a relatively small subscriber base in the United States and Japan it has content provision from some of the most prolific and popular providers which will make it one of the more sought after streaming media operations in the future.
NFLX stock price has had a rough ride in the last quarter of 2011. It made the decision to split the DVD delivery and streaming content delivery into two separate entities and raise prices. This caused subscriber uproar and resulted in Netflix reversing that decision. The result was investors seeing a company that did not trust its vision or commitment to its business plan. The stock enjoyed a lofty price on relatively low volume at the beginning of 2011. Investors started exiting the stock on higher volume since September of 2011. With this change in direction, NFLX lost all momentum on the growth of the subscriber base which grew from 20 million in 2010 to 25 million in the first three quarters of 2011 and saw a contraction to 23 million in the last quarter.
NFLX’s stated plans for expansion are to become the premier provider of streaming content worldwide. The plan to expand into worldwide markets will be hampered by its ability to provide a steady stream of new and interesting content to its subscribers. Consumers use different delivery mediums and are fickle. They will stop using Netflix when they can no longer get the content they desire.
NFLX does not produce or own the content outright. Producers of content derive almost all their revenues from the licensing of content to media outlets such as NFLX. These licensing agreements are lucrative to the producers. Content originators will continue to demand top dollar for fresh and desirable viewing material.
Originators of content such as HBO (TWC), CMCSA control their content by actually producing or purchasing the rights to exhibit it outright. The drawback to TWC’s and CMCSA’s model is that they control when the consumer can view the content. This may seem quaint in the “on demand” age, but HBO’s and CMCSA’s strength has always been in the production and broadcast of superior viewing material.
The difficulty with Netflix’s model is that it pays a premium on content and offers it all the time, anytime. As soon as the intersection of supply and demand catches up with Netflix, it will find the loss of subscribers will impact negatively on their capital outlays for content. They can continue to say that they are interested in becoming a global media presence, but they will not be able to attract subscribers if their product offerings are limited.
NFLX will have difficulty maintaining any kind of growth if they do not have the content to feed the pipeline. NFLX is faced with the difficult decision of paring back expansion on the subscriber and capacity side and entering into less costly licensing with the suppliers or originating its own programming, a risky and costly venture if they are not able to attract producers and originators of superior quality viewing material. The future success of NFLX may depend on being acquired by a content originator.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.